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Background on May 29, 2018, project 1635 was filed with the House of Representatives of Puerto Rico ( PR ) consolidating and modifying several tax incentives laws in PR under a single code (the tax incentives code or the Code ) such Code is expected to become effective as of July 1, 2018
Background the tax incentives are segregated as per the following: Individuals Exportation (services and goods) Financial and insurance services Visitor s economy Manufacturing Infrastructure Agriculture Creative industries Entrepreneurship others
General Comments The Code establishes return on investment (ROI) as a measurement tool which will be key in the granting of tax incentives. This tool will be implemented under the upcoming tax incentives regulations. Bill of Rights is established similar to the bill existing under the PR Internal Revue Code as a general rule, the decrees will be effective for a 15 year term and subject to a 4% fixed income tax rate, exempt distributions (there are important exceptions), 90% exemption of property taxes and 60% on municipal license taxes there are provisions for the renegotiation of decrees under the Code and to convert current decrees covered by existing tax incentives acts under the Code as well
General Comments Tax credits system is transformed into a cash refund system. Following are the industries allowed to request cash refunds: Touristic investment Manufacturing Research & development Conservation easement Film projects there is an ordinary transmittal and extraordinary transmittal Ordinary transmittal does not imposes an employment or investment requirement
Current Tax Incentive Laws Tax Incentives Act for the Retention and Return of Medical Professionals (Act 14 of 2014) Act to Promote Individual Investors to Puerto Rico (Act 22 of 2012) Act to Promote the Exportation of Services (Act 20 of 2012) Regulatory Act for the International Financial Center (Act 273 of 2012) Private Equity Funds Act (Act 185 of 2014) Puerto Rico Tourism Development Act of 2010 (Act 74 of 2010) Tax Incentives Act for the Development of Puerto Rico (Act 73 of 2008) Chapter Tax Incentives Code Individuals (Qualified Medical Physician) Individuals (Resident Individual Investor) Export of Trade and Services Finance, Investment & Insurances Finance, Investment & Insurances Visitor s Economy Manufacturing Green Energy Incentives Act (Act 83-2010) Agricultural Tax Incentives Act of Puerto Rico (Act 225 of 1995) Film Industry Economic Incentives Act (Act 27 of 2011) Young Entrepreneurs Act (Act 135 of 2014) Tax Exemption to Public Carriers of Air Transport Services (Act 135 of 1945) Act of Maritime Cargo Transportation (Act126 of 1966) Infrastructure & Green Energy Agroindustries Creative Industries Entrepreneurship Other Industries Other Industries
Individuals
Resident Individual Investor General Provisions should not have been a PR resident from January 17, 1997 thru the date of effectiveness of this Code prior to the Code, individual was not required to be a PR resident during the six years prior to January 17, 2012 must become a PR resident no later than December 31, 2035 Requirements must comply with an annual contribution of at least $5,000 to a non for profit entity operating in PR which is certified under section 501(c)(3) of the Federal Internal Revenue Code, as well as under section 1101.01 of the 2011 PR Internal Revenue Code
New Professional Resident of Difficult Recruitment (NEW) General Provisions new category under the Code should not have been a PR resident from January 17, 1997 thru the date of effectiveness of this Code must become a PR resident no later than December 31, 2035 must work full time in an exempt business further regulations will provide additional guidance and definitions (i.e. difficult recruitment) Benefits 100% exemption on salaries and benefits paid in excess of $150,000
Qualified Medical Physicians General Provisions must be admitted to the medical practice, Podiatry or any other specialization in Odontology on a full time basis application for tax incentives must be presented no later than February 21, 2019 tax incentives will become effective as of PR Resident: January 1 st of the year in which the application has been filed Non Resident: January 1 st of the year in which the qualified medical physician moves medical practice to PR and becomes a PR resident. This process must be completed within 120 days of approval of the grant. PR Resident currently under medical residency program: January 1 st of the year in which the medical physician establishes medical practice in PR minimum requirement of 180 hours dedicated to community services is kept unchanged a repayment program of student loans is established subject to the availability of the funds
General Provisions Student Internships (NEW) to be established by the Department of Economic Development and Commerce focused on Government functionality and the contact with public servers applicable to young students studying for a technical or university degree in a credited institution further guidance will be provided in regards to the development of internship programs and requirements
Researchers or Scientists General Provisions researcher or eligible scientist contracted by the University of Puerto Rico or any other institution of superior education authorized to operate in PR and engaged in eligible scientific research subject to certain requirements and certifications income tax exemption not to exceed $195,000 of salaries received researcher or eligible scientist contracted to provide scientific and technology research and development services within the district established under Article 7 of Act 214 of 2004 (Act to Create the Puerto Rico Science, Technology and Research Trust) income tax exemption not to exceed $250,000 of salaries received
Benefits for Individuals Individual Income Tax Long term Capital Gains Resident Individual Investor 100% exemption on interest & dividend income from all sources (exemption applies to alternate basic tax) Appreciation before PR residency: - 5% tax rate if recognized after 10 years - subject to tax rates as per the PR Internal Revenue Code if recognized during any other period Appreciation after PR residency: - 100% exemption New Professional Resident of Difficult Recruitment 100% exemption on salaries and benefits paid in excess of $150,000
Benefits for Individuals Individual Income Tax Earned dividends Medical Physicians 4% fixed tax rate 100% income tax and tax withholding exemption up to $250,000 per year Researchers & Scientists - 100% exemption up to $195,000 (excludes income rendered to persons other than University of Puerto Rico or Institution of Superior Education) - 100% exemption up to $250,000 on services rendered on research and development activities under Act 214-2004 $5,000 contribution to non for profit entities Not required for New Professional Residents of Difficult Recruitment. Qualified Medical Physicians, Researchers & Scientists
Export of Goods and Services
Eligibility Exportation of Goods and Services Eligible Export Services any entity or natural person with a bona fide office established in PR performing eligible services in and outside of PR prior to the Code the tax incentives were limited to corporations, limited liability companies, partnerships or any other legal person perform eligible export services which must not have any nexus with PR
Exportation of Goods and Services Eligible Export Services R&D Advertising and public relations Consulting Advise on matters related to trade or business Creative industries Production of construction, drawings, architectural and engineering services and project management Professional services Centralized management services Centers for electronic data processing Development of computer programs Distribution in physical form, network, by cloud or blockchain and related subscription and licensing income (new) Telecommunications voice and data between persons outside of PR Call centers Shared services Educational and training services Hospitals and laboratories services (including medical tourism and telemedicine facilities) Investment banking and other financial services Marketing centers Promoter Services (irrespective of nexus with PR) Any other service that is later determined as an eligible service
Exportation of Goods and Services Export Trade eligible activities (no nexus with PR) Trading Companies earning income from: the sale to foreign persons for the use, consumption and disposition outside of PR of products acquired by the exempt business for its resale commissions from the sale of products for their use, consumption and disposition outside of PR sale of products manufactured by order to foreign persons for their use, consumption and disposition outside of PR sale and distribution of intangible products to persons outside of PR storage, transportation and distribution of products from third parties (hubs) industrial and commercial distribution of products manufactured in PR for jurisdictions outside of PR packaging, assembly and bottling of products for exportation
Exportation of Goods and Services Base Period limitation of benefits when an Eligible Business is currently engaged in the activity for which the benefits are sought or had engaged in said activity at any time during the 3 year period preceding the filing of the application (the Base Period) the fixed income tax rate (4%) only applies to the excess net income from such activity over the Base Period Income the Base Period Income will be reduced at a rate of 25% annually until it is reduced to zero as of the fourth taxable year no phase out is available for export trade
Exportation of Goods and Services Base Period Income Base Period subject to income tax rates as per the Code excess of net income, for activities under the decree, over the average net income of the three (3) taxable years preceding the date in which the application was filed, will be taxed at a 4% fixed income tax rate
General Benefits Export Type of Tax Term of exemption Income Tax Real & Personal Property Tax Municipal License Tax Benefits 15 years 4% Fixed Tax Rate 100% exemption on distributions/benefits from exempt business 90% exemption 100% exemption on Construction in Process ( CIP ) (taxable portion taxed at the current tax rate at the date the decree was signed) 60% exemption (except on net capital gains from taxable operations) 100% exemption during first semester of operations 100% exemption on construction taxes applicable to exempt business, its contractors and subcontractors
Exportation of Goods and Services Additional changes under the Code term of the decree is reduced to 15 years with option to be renegotiation for 15 additional years 20 years prior to the Code new category is added known as Export Trade includes the distribution in physical form, network, by cloud or blockchain and related subscription and licensing income as an eligible export service reclassifies (i) centers for storage and distribution, (ii) commercial and mercantile distribution of products manufactured in PR to markets outside of PR, (iii) assembling, bottling and packaging operations for markets outside of PR, and (iv) international trading companies from Export Services to Export Trade eliminates 80% minimum requirement on the gross income previously applicable to international trading companies expands 90% exemption on property taxes to all eligible activities
Finance, Investment & Insurances
Private Equity Funds Changes under the Code the Code groups under this section Acts 185 of 2014, 273 of 2012 and 399 of 2004 requirements and benefits remain the same now the election to be treated as a Private Equity Fund is through the request of a tax grant creates an Opportunity Zone Fund whose dividends and interest income are not subject to income taxes or alternate basic taxes Tax grant is now requested to the Department of Economic Development and Commerce. In regards to the fund, the fund investing in the zone is required to request the grant in lieu of the investors.
Visitor s Economy
Visitor s Economy Eligible businesses are those engaged in tourist activities which are defined as the ownership and/or administration of: hotels, condohotels, paradores, agro lodging, guesthouses, time shares and vacations clubs, lodgings under the posadas de Puerto Rico program or certified as B&B s theme parks, golf courses operated by exempt hotel or within a resort and tourist marinas, as well as agro- tourism, nautical tourism and medical tourism facilities or activities operation of business that leases property to an Exempt Business development and administration of sustainable tourism and eco- tourism businesses, as well as natural resources facilities
Type of Tax Term of exemption Income Tax Distributions Royalty Tax Real & Personal Property Tax Municipal License Tax Sales & Use Tax Construction Excise & Fuel Tax Benefits Visitor s Economy Benefits 15 years with the option of renegotiation 4% Fixed Tax Rate 10% Fixed Tax Rate 12% Fixed Tax Rate 90% exemption 60% exemption 100% exemption 100% exemption Waiver & Other Exemptions Waives requirement of personal property leasing license and grants a 90% exemption on certain taxes related to property registry Other incentives Applicable to projects whose investments exceed $500,000,000 completed entirely with private capital. Casino income will be subject to a decreasing tax rate (25% to 8%), 90% property tax exemption and 100% exemption on municipal sales tax.
Visitor s Economy Changes under the Code establishes a fixed income tax rate of 4%, instead of a 90% exemption establishes a fixed income tax rate of 10% on distributions from an exempt business, instead of a 90% exemption reduces municipal license tax exemption to a 60% irrespective on whether the business is a new or existing business
Visitor s Economy Changes under the Code Other incentives are applicable to projects whose investments exceed $500,000,000 completed entirely with private capital. Casino income will be subject to a decreasing tax rate (25% to 8%), 90% property tax exemption and 100% exemption on municipal sales tax. applications will be processed by a Tourism Office appointed to the Department of Economic Development and Commerce extends the life of the decree to 15 years with option of renegotiation
Changes under the Code establishes monetary stimulus ( cash grant ) in lieu of tax credits subject to certain criteria the lesser of 10% of the project s cost and 30% on capital investment made by the exempt business stockholders availability of the cash grant Visitor s Economy the Exempt Business can take up to 10% of eligible investment (total project cost) as cash grants on the year that it secured the financing for the construction of the tourism project the remaining balance of will be taken in three (3) equal installments: 1/3 when the Exempt Business receives its first paying guest; and the remaining 2/3 on the subsequent years, in equal portions these cash grants are exempt from income taxes and municipal taxes
Manufacturing
Manufacturing - Eligible Businesses Production of manufactured products on a commercial scale Any bona fide office, business or establishment provided it renders services through subcontractors and as a Key Supplier Property devoted to industrial development Raising of animals for experimental use Scientific or industrial research and development laboratories Recycling Activities Harvesting and cultivation by means of hydroponics Value added activities related with the operation of the Port of the Americas (former Roosevelt Roads Base) and other ports Development of licensed or patented software (reproduced at commercial scale) Research, development, manufacturing, transportation, launching and operation from Puerto Rico of satellites and development service centers for processing and storage of data Licensing of intangible property developed or acquired by the exempt business Repair and maintenance of air and maritime carriers, as well as their parts
Tax Incentives for Manufacturing Type of Tax Term of exemption Income Royalty Real & Personal Property Municipal License Sales & Use Issuance of debt securities Benefits 15 years 4% Fixed Tax Rate 100% exemption on distributions 12% Fixed Tax Rate 90% exemption 60% exemption 100% exemption 100% exemption
Manufacturing Changes under the Code Cash grants are established in lieu of tax credits Except for tax credits available against income taxes on the investment for the transfer of technology (Intellectual Property Transfer Credit). Credit is non transferable, but can be carried over to subsequent years not to exceed 8 taxable years. Cash Grants purchase of products manufactured in PR by non related entities up to 25% of these purchases made during the tax year
Manufacturing Changes under the Code Credits that would not be available: Purchases of products manufactured in PR Electricity cost Job creation credit R&D credits Investment in machinery and equipment- generation and efficient use of energy Investment in strategic projects Industrial investment
Infrastructure & Energy
Infrastructure & Green Energy Structured under three areas energy production and sale of green energy at a commercial scale for consumption in PR assembly of equipment for the generation of green energy property engaged in the production of green energy certain laws applicable to construction and housing industry restoration and reconstruction of existing buildings and for elderly people reconstruction or development of social interest housing conservation easement tax grants available for 15 years
Benefits for Infrastructure & Green Energy Type of Tax Income Royalties Real & Personal Property Municipal License Benefits 4% Fixed Tax Rate, 100% exemption on distributions 12% fixed tax rate - 100% exemption on properties in Historic Zones, leasing of properties for social interest and CERs - 100% exemption during construction period for green energy businesses - 90% exemption on the rest of the eligible properties - 50% exemption available after expiration of decree - 90% exemption on construction of social interest housing, leasing of property to elderly people and housing project for assisted living - 60% exemption on the rest of the eligible properties - 100% exemption during first semester of operations, as well as the two subsequent semesters
Energy Changes under the Code Green Energy Investment Reimbursement Program is eliminated establishes cash grants in lieu of tax credits new cash grant of 50% of cash used by exempt business in research and development activities performed in PR which can be used in two or more installments decree term is reduced from 25 years to 15 years
Infrastructure Construction/Housing Changes under the Code fixed 4% income tax rate changes in particular periods of exemptions five (5) years on partial restoration on principal frontage five (5) years (non renewable) on restoration of a building with no historical value to temper it to the historic zone where it is located ten (10) years on total restoration of a building ten (10) years on total restoration of a building incorporating more than 50% of the elements for new construction on buildings with no historical value certain exemptions will be effective for a 15 years term period of exemption is reduced in comparison to provisions prior to the Code
Infrastructure Conservation Easement Changes under the Code Cash Grants on conservation easement applicable to PR Government or certain non for profit organizations that constitutes an eligible conservation easement or that donates eligible land required certifications from Department of Natural Resources, Institute of Puerto Rican Culture, Department of Agriculture, among others up to 30% of the value of the conservation easement or eligible land to be received in two installments these cash grants are exempt from income taxes and municipal taxes
Agroindustries
Agroindustries most of the provisions under Act 225-1995 are adopted Requirements agroindustrial business must derive at least 80% (previously 50%) of its gross income of one or more eligible activities
Agroindustries major changes under the Code establishes a fixed income tax rate of 4%, instead of a 90% exemption although exemption on property taxes is kept unchanged, requirement of usage of property for the activities covered under the decree was increased to 80% construction taxes are not mentioned bona fide farmer certifications
Benefits for Agroindustries Type of Tax Income Tax Real & Personal Property Tax Municipal License Tax Sales & Use Tax Other exemptions Benefits 4% Fixed Tax on bona fide farmer 100% exemption on all interests over debt instruments as of 1/1/1996 by bona fide farmers, as well as on dividends 100% exemption 100% exemption 100% exemption subject to certain conditions 100% exemption on the registration of property in PR for the use of the agroindustrial business *exemption on all taxes on the import or purchase of machinery and on Agricultural Insurance Corporation
Agroindustries Changes under the Code an application is required to benefit from these incentives which will be processed by the Department of Economic Development and Commerce other incentives the PR Government will provide funds on an annual basis to the best agricultural research proposals to promote research in agriculture
Agroindustries Changes under the Code Cash grants payroll subsidy on agriculture workers starting from $5.25 as of July 1, 2010 for the fiscal year 2010-2011 annual bonus to agriculture workers to be paid by the PR Government for an amount starting from $165 or 4% of the worker s annual income, whichever is greater, up to $235 bonus applies to hours worked of no less than 200 hours between the 12 month period from July 1 to June 30.
Creative Industries
Creative Industries Eligible business film projects production held in PR project works as a commercial exhibition to the public outside of PR $25,000 to $50,000 production expenses in PR studio operators strategic suppliers and dealers
Benefits for Creative Industries Type of Tax Term of exemption Income Tax Benefits 15 years Date of effectiveness can be prior to the date of filing of the application 4% Fixed Tax rate 20% special tax on non resident talent 100% exemption on distributions on liquidation Real & Personal Property Tax Municipal License Tax Sales & Use Tax Other exemptions 90% exemption 100% exemption 100% exemption subject to certain conditions 100% exemption on construction taxes applicable to dealers, contractors and subcontractors
Creative Industries Changes under the Code establishes fixed income tax rate of 4% applicable to study operators as well 20% special tax for non resident talents eliminates the following projects under the definition of a Film Project music videos live recorded shows recordings of original soundtracks
Creative Industries Changes under the Code establishes monetary stimulus ( cash grant ) in lieu of a tax credits applicable to film projects with respect to expenses incurred in PR in the production of series in episodes, mini series and TV programs 20% to 40% of amounts certified by an auditor as being reimbursed with respect to production expenses in PR up to 30% on expenses related to principal cast subject to certain conditions (PR being mentioned favorably and as a principal location) cash grant will be received in two installments infrastructure tax credit of 25% is eliminated as well as other credits that used to reduce net investment to 10%
Entrepreneurship
Entrepreneurship Young entrepreneurs PR resident individuals between the age of 16 and 35 years old, with high school diploma or its equivalent interested in establishing a new business in PR Requirements business must commence principal commercial operations after the signing of agreement with the PR Government business must be managed only by young entrepreneurs tax benefits will apply only to one new business per young entrepreneur
Benefits for Entrepreneurship Type of Tax Term of exemption Benefits 3 years as of the date of commencement of operations Income Tax Personal Property Tax 100% exemption on net income less than $500,000 subject to tax 100% exemption on distributions 100% exemption Municipal License Tax $5,000 contribution to non for profit entities 100% exemption Not required
Entrepreneurship Changes under the Code incentives are now granted by the Department of Economic Development and Commerce prior to the Code, these were granted by the Trade & Export Company establishes exemption from $5,000 donation requirement to non for profit entities keeps the preferential rental program to PYMES of $1.00 during the first three years on eligible property from the Department of Economic Development and Commerce
Entrepreneurship Changes under the Code keeps the concept of Business Incubator Programs in PR to encourage the start of new businesses in PR or accelerate the growth of start ups the Code does not provide details on the incentives to be granted
Other Matters
Credits on Research & Development Cash Grants available to any business with a tax decree granted under this code up to 50% of the special eligible investment made in PR within the tax year after the approval of the Incentives Code payable in two or more installments these grants need to be reinvested in research and development activities in PR these cash grants are exempt from income taxes and municipal taxes
Small & Medium Sized Businesses (PYMES) Small & Medium sized business exempt business with an average volume of business of $3,000,000 or less during the three (3) taxable years prior to the current tax years New Small & Medium sized businesses has not commenced operations as of the date of effectiveness of the tax incentives code
Benefits for new PYMES (Small & Medium Sized Businesses) Type of Tax Income Tax Benefits 2% Fixed Tax Rate during the first 5 years 4% Fixed Tax Rate afterwards during the term of the decree Real & Personal Property Tax Municipal License Tax 100% exemption during the first 5 years 90% exemption afterwards during the term of the decree 100% exemption during the first 5 years 60% exemption afterwards during the term of the decree Cash Grants $5,000 contribution to non for profit entities Lease of property for business operations Up to 30% on purchases of products manufactured in PR Not required $1.00 rent during the first three years of lease
Benefits for Exempt Business operating in the Municipalities of Vieques and Culebra Type of Tax Income Tax Benefits 2% Fixed Tax Rate during the first 5 years 4% Fixed Tax Rate afterwards during the term of the decree Real & Personal Property Tax Municipal License Tax 100% exemption during the first 5 years 90% exemption afterwards during the term of the decree 100% exemption during the first 5 years 60% exemption afterwards during the term of the decree Cash Grants $5,000 contribution to non for profit entities Up to 30% on purchases of products manufactured in PR as long as they are operating from Vieques or Culebra Not required as long as it is also considered a PYMES
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